Legg Mason Said to Name Sullivan Chief Executive Officer

Legg Mason Inc. named Joseph A. Sullivan as chief executive officer, ending a five-month search
for a leader to reverse five years of client redemptions and
calm restive fund affiliates.

Sullivan, 55, served as interim CEO since Oct. 1, when Mark
Fetting stepped down amid pressure from activist investor Nelson
Peltz to improve the company’s performance. Dennis M. Kass, who
retired in 2012 as head of Jennison Associates LLC and
previously spent more than a decade at JPMorgan Chase & Co.’s
investment management unit, will join the board of directors,
Baltimore-based Legg Mason said today in a statement.

In picking Sullivan, Legg Mason turned down an opportunity
to reach outside its ranks, which may reduce the chances of
dramatic changes to the firm’s strategy. Raymond A. “Chip”
Mason, who in 1970 merged his company with a regional brokerage
to form Legg Mason, led the firm until 2008. He was succeeded by
Fetting, who had previously headed the mutual fund and managed-
accounts businesses.

“It’s just status quo,” said Greggory Warren, a senior
stock analyst at Morningstar Inc. in Chicago. “It’s going to be
difficult for these guys to effect a turnaround as long as they
continue to run the affiliate model because it doesn’t allow
them to be as nimble as they need to be.”

Declining Assets

Legg Mason declined 2.3 percent to close at $27.28 in New
York. The shares have fallen 1 percent in the past 12 months,
compared with a 29 percent increase in the 20-company Standard &
Poor’s index of asset managers and custody banks. The stock has
fallen 80 percent since reaching a high of $136.40 in February
2006.

The firm, whose assets swelled to a peak of $1 trillion in
2007 as investors flocked to funds managed by top-ranked
managers such as Bill Miller, slumped to $654 billion at the end
of January as performance declined and investors pulled money.
Since the fourth quarter of 2007, the firm has had investor
withdrawals of $368 billion, most recently suffering redemptions
of $7.5 billion in the quarter ended Dec. 31.

Sullivan’s pick was endorsed by Peltz’s Trian Fund
Management LP, which held 9.99 percent of Legg Mason shares as
of Sept. 30, according to data compiled by Bloomberg.

“We believe Joe brings the leadership skills required to
strengthen and expand the capabilities of Legg Mason to create
long-term value for Legg Mason shareholders,” New York-based
Trian said today in an e-mailed statement. “Dennis Kass will
bring valuable insights and leadership skills to Legg Mason’s
board as it works closely with Joe to unlock Legg Mason’s
potential.”

Gabelli’s Backing

The CEO choice was also backed by Mario Gabelli, head of
Gamco Investors Inc., which is the seventh-largest shareholder
with 3.91 percent of shares, according to data compiled by
Bloomberg. Sullivan may continue to use the majority of cash
flow to buy back stock, which means Gamco’s clients will own
more of Legg Mason without putting up more cash, Gabelli said
today in a telephone interview.

Sullivan worked for 12 years at Legg Mason Wood Walker, a
brokerage formerly owned by Legg Mason, before leaving then
rejoining the firm in 2008 as chief administrative officer. He
was later named head of global distribution at Legg Mason. From
2005 to 2008, he worked at Stifel Nicolaus & Co. as head of
fixed-income capital markets, after it bought Legg Mason’s
capital markets business

‘Laserlike Focused’

“The thing that I’m laserlike focused on is really working
more closely with our affiliates on the various challenges and
issues that we have,” Sullivan said in a telephone interview
today. “We’re not going to sit in an ivory tower on an isolated
basis and make decisions.”

Sullivan faces a push for greater independence by some of
Legg Mason’s eight investment affiliates. Sullivan has indicated
he’s more open to working with the units, which include bond
manager Western Asset Management Co. and equity managers such as
ClearBridge Investments and Royce & Associates. Legg Mason’s
affiliates operate independently and have separate revenue-
sharing agreements.

Permal Agreements

During the quarter ended Dec. 31, Legg Mason completed
restructuring agreements with its Permal hedge-fund unit, which
include a management equity plan, a revised revenue-sharing
agreement and new multiyear employment contracts with key
employees.

Western Asset, the company’s biggest investment unit, is
seeking more control of its fund sales by trying to negotiate a
move away from the centralized distribution model in which sales
of retail products go through Legg Mason, a person familiar with
the matter said in November.

Sullivan said today he’s had “constructive conversations”
with Western regarding its distribution and is having
discussions with affiliates on equity plans. He said he wouldn’t
forecast any additional revisions to revenue-sharing agreements.

In May, Western said it was removing the Legg Mason name
from its U.S. mutual funds as part of a rebranding to increase
sales to individual investors. ClearBridge, which is Legg
Mason’s largest stock-fund affiliate, said in October it was
dropping the Legg Mason name from its mutual funds as part of a
push to make its brand better known. In January, Legg Mason said
it was folding Miller’s Legg Mason Capital Management division
into ClearBridge as assets tumbled.

Affiliate Support

Each of the affiliate CEOs had the opportunity to interview
Joe as well as the external candidates being considered, said
Terrence Murphy, CEO of ClearBridge. Murphy said he was
supportive of Sullivan in part because he was successful in
saving Legg Mason more than $100 million by moving shared
operations and technology groups back to the affiliates.

Chuck Royce, president of small-cap stock manager Royce &
Associates, said in an e-mailed statement that Sullivan is “a
smart, focused leader who knows the company well, is highly
supportive of the affiliate model, and has considerable industry
and distribution experience.”

Legg Mason this month reported a loss of $453.9 million, or
$3.45 a share, for the three months ended Dec. 31, the biggest
quarterly shortfall since it posted a $1.5 billion loss at the
end of 2008. Earnings were hurt as redemptions and declining
assets forced the company to write down assets tied to the 2005
takeover of Citigroup Inc.’s asset-management business and to
Permal.